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How Health Care Reforms Affect Medicare

Controlling the rising costs of Medicare doesn’t mean cutting benefits.

Older Americans are speaking out in polls and public forums across the country—voicing their angry suspicions that health care reforms would cut Medicare benefits or increase their costs to help pay for covering the uninsured. While this summer’s spate of anti-reform propaganda—with predictions of “death panels,” care denied to those who are “too old” and even the “elimination” of Medicare—has consistently been exposed as false, it inevitably feeds those fears.

Experts who have studied the proposals now being debated generally say the changes actually aim to strengthen Medicare and improve beneficiaries’ care and access to physicians. The proposals even add new benefits; for example, making preventive measures, such as mammograms and colonoscopies, free to beneficiaries and substantially improving prescription drug coverage. Still, the fears remain.

“Medicare beneficiaries are the most satisfied of any Americans with their health coverage, so it’s natural for them to worry about any changes that might alter it, especially when they’re being lied to in a deliberate attempt to make them feel anxious,” says Jonathan Oberlander, a professor of social medicine and health policy at the University of North Carolina, Chapel Hill, and author of The Political Life of Medicare.

Almost no Americans can now remember what it was like to be 65 or older before Medicare began in 1966. “In those days,” Oberlander says, “insurance companies wouldn’t insure seniors because they were considered bad risks, so millions had no health coverage and often faced financial ruin if they became very sick.” In other words, the same predicament as millions of people under 65 face now.

Today, older Americans on Medicare “have an incredibly valuable security blanket,” says Joe Baker, president of the Medicare Rights Center, a nonprofit advocacy and help group. “So once you start rocking that boat, they react viscerally. But I think if you don’t scare them, seniors view reform more positively. They’d love for their children and grandchildren to have the same sense of security that they have now.”

The complexity of reforming the system only adds to uncertainties. Details of some proposals—especially financing measures—are bafflingly technical. When supporters of reform, and even President Obama, use phrases like “bending the cost curve” to explain how potential savings from Medicare can help fund reform without cutting benefits, millions of eyes glaze over. But opposition sound bites about “rationing” and “pulling the plug on Granny” resonate because they’re frighteningly simple.

Although media coverage of town hall meetings across the country this summer focused on seniors protesting against reform, many members of Congress reported that their own unpublicized town halls were calm affairs with Medicare beneficiaries raising sensible concerns about how reform might affect them personally. Can billions of dollars be carved out of Medicare to help pay for it, without affecting benefits? If reform succeeds in covering the 46 million who are currently uninsured, will there be enough doctors to treat everyone? And what’s the outlook if no action is taken?

What happens to Medicare without reforms?

Often missing from the public conversation is what happens to Medicare if nothing is done. If Medicare’s expenditures exceed its income—which for the hospital side of the program is projected to happen as early as 2017—the only way it could then get out of the hole would be to raise payroll taxes, or reduce benefits, or increase enrollees’ share of the costs, or a combination of all three.

If nothing is done, beneficiaries’ out-of-pocket Medicare expenses will eat up an increasing part of their Social Security checks, according to the 2009 Medicare trustees’ report.

“So we do need to make some changes in the program … [and] we need to start now,” says Mark McClellan, who ran Medicare as head of the Centers for Medicare & Medicaid Services under the administration of President George W. Bush. “The best way to keep benefits secure and keep health care costs down for seniors is not to be afraid to take some steps to improve this program,” he says. “It’s not about saving money itself. It’s really about making the program better.

How will "savings" from Medicare affect benefits?

Both the House bill (HR 3200) and draft legislation from the Senate Finance Committee, released this week, include around $500 billion in savings carved from future growth in Medicare spending over a 10-year period. Although that sounds like a huge sum, it’s actually only a small fraction of the $6.4 trillion expected to be spent on Medicare from 2009 to 2019. Still, where will the money come from?

The savings are expected to be achieved mainly by: reducing fraud and waste more aggressively; reducing government subsidies to private Medicare Advantage plans; paying doctors more for practices that improve quality of care and save money; and paying providers (notably hospitals and home health agencies) a little less of an increase each year in an effort to gradually trim the rate at which Medicare costs climb over time—aka “bending the cost curve.”

“These are not reductions in benefits; they’re not even reductions in the prices that Medicare pays. It’s a slowdown in the increases in prices,” says McClellan, a physician and economist who now heads the Engelberg Center for Health Care Reform at the Brookings Institution in Washington.

Increasing the quality of care while saving money sounds like a tall order. Yet a number of leading medical centers have shown it can be done. So has Medicare. In Medicare’s recent incentive-payment pilot programs across the country, physician groups received incentive payments for meeting standards that improved the care of patients with diabetes, heart disease and cancer. In one year, five groups alone generated $32.3 million in savings to Medicare, because better care reduced the expense of complications, unnecessary tests and hospital readmissions.

“These steps are win-win,” McClellan says. “It’s not about squeezing money out of Medicare and putting it somewhere else in health reform. It’s about changing the way we pay so that we all [government and beneficiaries] get more for the dollars we spend.”

Slowing down overall Medicare spending is directly in beneficiaries’ own interests, Oberlander says: “If they’re paying 20 percent of the costs, and that bill keeps going up and up, the burden on them is really going to become too much.”

Cutting government subsidies to private Medicare Advantage plans, in which just under 25 percent of beneficiaries (10.4 million) are enrolled, is far more controversial. Medicare currently pays an average of 14 percent more for people in these plans—about $1,100 a year per person more—than for those enrolled in the traditional Medicare program. And the latter actually contribute to the subsidies through their Part B premiums.

The subsidies allow the plans to offer extra benefits and/or lower costs, which attract beneficiaries to enroll. But those “enhanced benefits are funded by the taxpayers and all beneficiaries,” according to the Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare finances. “This added cost contributes to the worsening long-range financial sustainability of the Medicare program,” the MedPAC said in a 2009 report. Also, it added, a portion of the subsidy is “used for plan administration and profits and not direct health care services for beneficiaries.”

Under the House bill, these higher payments would end by 2013, saving an estimated $172 billion over 10 years. If that happens, Medicare Advantage plans could cut the extra benefits they now provide to enrollees, raise their costs or withdraw from Medicare. Or the plans could become more efficient and/or accept less profit. The bill also provides bonus money to them for quality results.

AARP supports cutting the plans’ higher payments, even though AARP Services Inc. endorses a Medicare Advantage plan. “Gradually eliminating these excess payments will permit good plans to continue and put pressure on others to offer better value to their enrollees,” says John Rother, AARP’s executive vice president of policy. “That’s what fair competition is supposed to do.”

If all the uninsured are covered, will there be enough doctors to go around?

Acute shortages of primary care doctors already exist, especially in rural areas. The House bill has several remedies to improve this situation.

A key measure would eliminate a 21 percent pay cut to Medicare physicians, scheduled to go into effect in January, which might otherwise cause some to stop treating Medicare patients or decline to accept new ones. The bill also includes incentives to attract more doctors into primary care and into areas with physician shortages, and enhance nursing services. “The bill has extensive provisions to increase the supply and improve the training of primary care physicians,” the American College of Physicians, which represents 129,000 doctors and medical students, comments on its website.

Are those measures sufficient? That’s debatable. But anything that bolsters doctors and the medical workforce in general benefits older Americans the most, says Baker of the Medicare Rights Center, because people 65 and older use far more medical services.

In some ways, making health insurance accessible to those who are currently uninsured could take pressure off Medicare instead of increasing it. “If they show up in Medicare when they’re 65, and they haven’t been getting the care they need when they’re younger, they’re a lot sicker, and that’s a drain on the system as well,” Nancy-Ann DeParle said in a recent AARP broadcast. DeParle ran Medicare during the Clinton administration and now heads President Obama’s Office of Health Care Reform.

The uninsured already use medical services, whether they’re paying out of pocket or receiving uncompensated care, Baker says. “And we may see only a gradual expansion of people with insurance,” he adds. “It’s not going to all happen in one year.”

Indeed, history shows that worst-case fears that accompany any big change often evaporate. More than 19 million seniors were poised to start using Medicare on July 1, 1966. Amid fears that they’d all show up at hospitals on that day, Army and veterans hospitals were put on alert, with helicopters on standby, to take the overflow. But there weren’t any lines anywhere, according to the late Robert Ball, the Social Security commissioner who implemented Medicare: “We didn’t need a single Army bed . . . or a single helicopter,” he recalled.

With hindsight, it’s ironic that Ball was speaking at a 1992 symposium to consider the logistical problems of suddenly covering millions of previously uninsured people—just in case Congress enacted universal health care.

Patricia Barry is a senior editor of the AARP Bulletin who covers Medicare and health policy issues.

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